Silver Linings

Once India's undisputed workhorse in the renewable sector, wind power may have been out-paced but not beaten, with tenders for the sector being seen as a revival tool.

Since being identified as a potential response to India's crucial power challenges since the 1990s, wind energy has undergone a major shift in India, and even after a good 25 years, its full potential is yet to be realised.

However, with ~28.5 GW of total projects already installed, FY16 was a historic year as wind energy has surpassed all its previous records with ~3,300 MW installation. India's wind energy sector thus witnessed an unprecedented acceleration last year, and is expected to grow at a rate of 30 per cent annually, propelled by technology and conducive policy environment for renewables.

The sector has also recently shifted from a Feed in Tariff (FiT) route to the competitive bidding regime, the industry rather reluctantly welcomed the step which could be seen from the healthy participation in the bid.

Tenders
Providing a further boost for the sector, India's first wind tender by the Solar Energy Corporation of India (SECI), was oversubscribed despite off-take uncertainties. It resulted in a record low wind power tariff of Rs.3.46 (USó5.2)/kWh; with Mytrah, Sembcorp, Inox and Ostro emerging the winning bidders, to be awarded 250 MW each.

The first auction was conducted in February 2017, for a capacity of 1,050 MW by SECI for the Interstate Transmission System (ISTS), i.e. the projects were to be connected to the PGCIL network taking advantage of the charges and losses waiver. The tariff fell to Rs.3.46 from the lowest prevailing tariff of Rs.4.18. As per the PPAs signed, Mytrah Energy, Inox Wind and Ostro Kutch Wind Pvt. Ltd. would supply wind power of capacity 250 MW each. Further, Green Infra would supply 249.9 MW and Adani Green Energy 50 MW from their wind power projects through ISTS at a tariff of `3.46/kWh discovered through the open and transparent competitive bidding process. PTC India has tied-up this wind power for sale to discoms of Uttar Pradesh (449.9 MW), Bihar (200 MW), Jharkhand (200 MW), Delhi (100 MW), Assam (50 MW) and Odisha (50MW) for meeting their non-solar RPOs.

There are two unique aspects of this tender - i) successful bidders will sign 25-year PPAs with PTC India Limited, which will sign back-to-back PPAs with as yet unknown discoms; and ii) existing operational projects and/or under construction projects are eligible to participate.

The tender should make it more attractive for discoms by bringing down tariffs. According to Bridge to India, however, the proposed off-take structure may pose challenges for developers as well as discoms, and policy makers need to proactively ensure that renewable project capacity is evenly distributed across the country for easier integration in the grid.

It is also noteworthy that in the bidding regime, OEMs would no longer be at a liberty to charge a higher premium commensurate with attractive FiTs, therefore significant reduction has been observed in capital costs which has further driven down the bids. Points out Amit Kumar, Partner - Renewables, PwC India, 'In case of the OEMs, the market has dried up with no state willing to sign FiT PPAs after the result of the first auctions. The bids for the second round have also been submitted and the auction is awaited. It is expected that the second round will be further more aggressive and the prices will come down further.'

Solar sector has leapfrogged wind in the last two years since the announcement of enhanced 2022 target of 100 GW for solar power and 60 GW for wind power. There are many reasons for this including solar technology's potential for wider geographical deployment (wind is restricted to southern and western India) and technology enhancements.

More importantly, however, the auction route has driven solar tariffs sharply down whereas wind tariffs have been steady under the FiT regime. Power Minister Piyush Goyal, has been reiterating for some time that wind power should also be procured through auctions to lower tariffs and scale up capacity addition. This tender is a first step towards that change and should pave way for future development of wind power in the country.

In line with the central scenario, states like Gujarat and Tamil Nadu have also come up with reverse auction bids for wind. There have also been cases wherein discoms of states like Karnataka, Andhra Pradesh and Uttar Pradesh have declined from signing any wind PPAs for further procurement. These states have clearly shown their inclination towards shifting to competitive bidding over the FiT regime.

However, BTI feels that concentrating projects in resource heavy states and putting strain on the transmission grid is undesirable. 'Solar project allocation has already moved to state level auctions for this reason and some states are further trying to limit renewable capacity development at sub-state (taluka) level. There is no good reason why this learning from solar sector should not be utilised for wind tender,' the consultancy observed.

Overall, the first wind tender is a step in the right direction. Over time, there are expectations that project allocation for the entire renewable sector to be streamlined and become technology agnostic.

Financial nitty-gritties
GoI wants to tender out 4 GW wind next year but capacity addition through the tendering process often takes a long time. This may lead to a short-term demand hiatus in the market. Concentrating projects in resource heavy states will also put more strain on the transmission grid. It remains to be seen if investments in grid can keep up with increases in generation capacity and inter-state flows of power.

Unlike solar projects where major bids have happened in solar parks with required infrastructure already available, wind developers still need to arrange for land, approvals, evacuation up to the interconnection point. These unstated costs need to be considered in the project cost estimates.

Further the drop in solar tariffs are driven primarily by the falling cost of modules, while a drop in WTG prices is not evident. Further, under the competitive bidding finding a good wind site with evacuation access to the central transmission corridors and mitigation of the counter party risk, is critical to ensure lower cost.

Points out Kumar, 'the recent bids are sustainable, but certainly not as lucrative as the FiTs prevalent earlier.

The aggressive bidding has trickled backwards and has caused a fair share of competition among turbine manufacturers only.'

The economics of lower tariff discovered through competitive bidding has relied upon a combination of high PLFs, lower cost of debt, the best deals for O&M, as well as lower risk premium owing to PPA with entity that has better credit rating than the distribution companies. 'Our analysis indicates that tariff of `3.46 discovered during the ISTS bid can still fetch investors reasonable returns of 12-15 per cent,' he stated.

CRISIL Research meanwhile believes that while deployment of latest technology and lower financing charges would reduce generation cost, aggressive bids by developers to scale up their portfolios will mean suboptimal equity internal rate of return. Rahul Prithiani, Director, CRISIL Research, points to the sustainability, 'The bids are fairly aggressive and assume most of the project risks to play out favourably. For achieving the good returns, generating PLFs of close to 35 per cent will be necessary through the life of the projects. Hence, location of the project will be very critical.' 'RoI improvement for the developer is unlikely compared to the earlier mechanism. Further, returns will the contingent on site specific factors which will influence PLFs. Under standard PLF assumption of 28-30 per cent the equity IRRs are likely to be at 8-10 per cent,' he adds.

However, the market for wind power would expand with more active participation by the central government, which reduces the risk for developers. Higher off-take from power distribution companies with lower tariffs will also support capacity additions. Thus, overall compliance with the renewable purchase obligation is expected to increase, particularly by non-windy states such as Uttar Pradesh, Haryana, Delhi, Odisha and Chhattisgarh.

Says Prasad Koparkar, Senior Director, CRISIL Research, 'To compete in bids, developers are likely to put pressure on wind OEMs, denting their profitability.' Also, gradually, developers would go for the self-development model, piling more pressure on OEM margins as the premium charged for value-added services like clearances, wind resource assessment and grid connectivity would come down. 'But OEMs having land banks with high wind potential and proximity to the central transmission utility will be less impacted because these would fetch a premium,' he adds.

The economics of the winning bids is quite stretched and assume high PLFs through the life of the projects. The ability to achieve desired PLFs, manage project implementation, address operational and receivable risks is likely to be challenging thus increasing the risk profile of projects.

Challenges
The challenges will remain the same as in other auction processes to ensure realistic bidding so that project implementation does not suffer. Further under the new model finding a good wind site with evacuation access to the central transmission corridors and mitigation of counter-party risk, is critical to ensure lower costs, are the key challenges for the same.

Due to limited opportunities in the wind energy market owing to transitional delays in shifting from feed-in-tariff regime to competitive bidding, expiration of benefits like 80 IA and generation based incentives and halving of accelerated depreciation benefits and competition from solar segment, the companies are aggressively bidding for projects with relatively lower counter-party risk.

Thus, Prithiani feels that the FiT model adopted by state discoms is likely to peter out. Going forward, discoms are likely to buy power from competitively bid projects for meeting Renewable Purchase Obligations (RPO) requirements. OEMs and developers would have to settle for lower returns.

Till the fresh tendering process is initiated the project developers will be in wait and watch mode. With discoms not signing any fresh power purchase agreements (PPAs) on existing feed-in-tariffs there could be some slowdown in capacity additions. The transparent bidding mechanism will ensure lowest cost wind power is available to the state discom. 'Going forward, we would see large independent power producers undertaking project related activities in house to cut costs,' he adds.

The ISTS bid was the first of its kind, wherein the PPAs have been be signed with an entity that has better credit rating than the distribution companies, contributing to lower pricing. The sites chosen by developers are also in TN and Gujarat which are the windiest regions in the country resulting in lower bid tariffs.

Unlike solar energy, wind farms in India are concentrated in a few high wind states such as Tamil Nadu, Maharashtra, Karnataka, Andhra Pradesh, Gujarat and Rajasthan. Even within these states, only selective sites offer high wind energy potential, which has been the main asset of OEMs as they had wind resource data recorded for a few years at these sites. Competitive bidding, especially ISTS has narrowed down the sites which need to be close to CTU sub-station.

'Weaker pipeline of projects and shift to competitive bidding have marred the positive sentiment in the sector and OEMs have reported lowest quarterly profit in a year,' feels Kumar. Suzlon has reported a PAT of Rs.45.35 crore in quarter ending June 2017, whereas PAT reported in previous three quarters was Rs.499.45 crore, Rs.433.45 crore, and Rs.284.52 crore respectively. Inox Wind in fact reported a loss of Rs.30.88 crore, while PAT reported during last three quarters was Rs.68.76 crore, Rs.116.56 crore and Rs.52.90 crore respectively.

Given that prices of solar power had fallen to as low as Rs.2.44/KWh and with wind FiTs more than double of this (Rs.4.78 in MP, and Rs.4.84 in AP for FY17), competitive bidding for wind was inevitable. With only a handful of sites on offer, and with prices of WTGs being bottomed out, each developer is trying to out think the other player in order to get a slice of the allocated capacity. Many developers are now extending the activities in the value chain including transportation, installation, land procurement, etc., to improve their margin and obtain higher returns from projects. However, in times of low tariffs it is extremely important that wind tariffs are in line with the solar tariffs in order to make its acceptability among the discoms still strong. With the existing FiTs for wind being significantly higher than those of solar which was being discovered during competitive bidding, wind was facing the risk of pricing itself out of the market.

Adds Kumar, 'Thus, the transition from FiT to competitive bidding is a progressive change, which would make the sector commercially popular and sustainable in true sense.'

India's first wind power auction to upend traditional business model

The old model of wind procurement had become dysfunctional and significant delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months were hurting the developers very badly.

The sector is likely to shift entirely towards auction based allocation route but this transition may lead to a short-term hiatus in the market.

It remains to be seen if investments in transmission grid can keep up with increases in renewable generation capacity and inter-state flows of power.

The tender also provides a template for locating projects in high wind resource states, Tamil Nadu and Gujarat, and reducing power costs for other states.

Auctions are expected to provide more transparency to the sector, break wind turbine manufacturers' domination and make the wind turbine market more efficient.